The current economic downturn began in 2008 with a wave of frequent Chapter 11 filings that continued until last year. In light of the two-year limitations period (commencing on the filing date) under 11 U.S.C. §546(a), it is not surprising that this wave of case filings has been followed by a wave of avoidance actions. As these cases proceed before our bankruptcy judges, the limits of a trustee's avoidance powers are becoming more defined.

In a decision in Industrial Enterprises of America Inc.( In re Pitt Penn Holding Inc .), No. 09-11475, Adv. No. 11-51868 (Bankr. D. Del. Jan. 24, 2012), Judge Brendan L. Shannon held that the two-year period set forth in 11 U.S.C. §548(a) is not a statute of limitations. Instead, it is a substantive element of a fraudulent conveyance action. As a result, this period is not subject to equitable tolling.

Industrial Enterprises of America (IEAM) filed an adversary proceeding against certain individuals, including Susan and Matthew Collyer, according to the opinion. The Collyers moved to dismiss the complaint on the grounds that the underlying transfers occurred more than two years before the petition date. Shannon granted the motion, holding that the transfers occurred several months beyond the look-back period.

IEAM recognized that this ruling conflicted with several earlier orders issued in connection with IEAM fraudulent conveyance actions. In those cases, the court had denied motions to dismiss, holding that IEAM had pleaded a basis for equitable tolling. IEAM therefore filed a motion for reconsideration. The court agreed to reconsider its dismissal of the action against the Collyers and invited similarly situated defendants to submit briefs.

In reaching his conclusion, Shannon noted that statutes of limitations regulate "secondary conduct" (i.e., the filing of an adversary proceeding) and not primary conduct (i.e, the transactions that give rise to a cause of action). Statutes of limitations restrict secondary conduct by "restricting the time within which a party may institute proceedings" after a cause of action has accrued.

Shannon then reviewed the language of §548.

Although, Shannon wrote, §548 "clearly" creates a cause of action for a debtor or trustee: "[N]owhere does it cap or 'regulate' how far into the future the Trustee may bring that claim (the 'secondary conduct'), something a statute of limitations would do. Instead, the §548 look-back provision does just what it says: it looks back from when the cause of action accrued (the petition date) to see if transfers occurred within the previous two years. By contrast, a statute of limitation begins running when a cause of action accrues and requires a litigant to file its claim within a certain time in the future, or perhaps lose it forever."

In other words, §548 identifies the "universe of transfers that are avoidable" as fraudulent conveyances. It does not identify a date by which a plaintiff must perform any act. By contrast, §546 of the Bankruptcy Code sets forth "a true statute of limitations." That section unambiguously identifies the date by which an action must be commenced. It does not identify the elements of any particular cause of action. Most importantly §546's limitations periods, as true statutes of limitations, may be equitably tolled.

Shannon expressly rejected the holding in Official Committee of Unsecured Creditors v. Pardee ( In re Stanwich Financial Services Corp. ), 291 B.R. 25 (Bankr. D. Conn. 2003), the only case cited by IEAM in its motion for reconsideration. He noted that the Pardee court "did not consider as this Court and others have, [whether] the look-back period is a statute of limitations or is instead a substantive element of a §548 claim, nor did it address the effect of that distinction on equitable tolling."

As a result of his decision, Shannon declined to alter or amend his original order dismissing IEAM's claim against the Collyers.

More importantly, his decision will provide guidance to plaintiffs and defendants as to the limits of a trustee's avoidance power.

Michael R. Lastowski is a member of Duane Morris and the head of its Wilmington office. Licensed to practice in Delaware, Pennsylvania and New York, he primarily represents Chapter 11 debtors.

Reprinted with permission from Delaware Business Court Insider, © ALM Media Properties LLC. All rights reserved.